cash flow classification of interest paid

Interest paid is cited in the text as an operating cash flow. However, ‘for analytical purposes, interest payments should be reclassified as financing cash flows’, since they relate to the capital structure decision of the firm. What circumstances dictate whether to classify interst payments as operating/financing cash flows? Is it strictly the accounting policy of the firm that determines this?

Under GAAP, you always construct a CFS with the interest expense under the Operating section regardless of accounting policy. International standards allow interest to be classified under financing but, again, GAAP offers no such provision. The analytical purposes the text is citing refers to ratio analysis where there is a distinction between financial risk (e.g. EBIT/interest) and operating/business risk (e.g. Gross Profit Margin).

For analytical purposed would probably mean for valuation purposes. When you are valuing the company you would want to move it to CFF. This would be covered in Level II.